[s1artibartfast]

Counterpoint - I wish someone had explained consumption smoothing to me when I was younger. One of my greatest regrets in life (literally) is not taking on more debt in college for exactly that reason.

People do it all the time and to far greater extremes. A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

It doesn't seem like they are being particularly risky. They have a large buffer, and a solid like of credit for more student debt. Who knows, maybe their student debt will even get forgiven.

[bruce511]

This is all about risk, and the value of risk (which we seldom see or recognize, much less quantify.

In one sense there's risk in taking on debt. Risk of job loss etc. In another the lender is taking on risk - they're hoping you can repay. Part of interest is to cover inflation, part is to hedge the risk.

Many comments in this thread start with the writers attitude to risk. What if....

And there are definitely places where the strategy can turn bad. Holding stocks can be valuable (they're growing faster than the cost of money) but they can also lose value (sometimes quickly).

Real value in shares is in long-term positions (just ride out the dips) but margin borrowing can force sales inside a dip if you are over-leveraged. How much you lever depends on your appetite for risk.

In a recent exchange with a potential client I explained that I get paid up front. He normally pays 90 days. He complained that my approach meant he'd "take all the risk".

"Exactly."

I offered to requote, where I take the risk, but I warned him it would be substantially more -because I put a high value on risk-. He trusted me enough to pay up front, and his risk paid off.

It's hard to quantify risk, but it really helps to at least understand it exists, and what the risks are. "Seeing" risk takes some practice.

[s1artibartfast]

I think you have an excellent analogy. The thing I like about it is it includes the fact that there is often a large cost for not taking risk. I feel like a lot of otherwise smart people get caught up in avoiding risk buy overlooking the cost to do so.

In my opinion there's a hierarchy of understanding but I've gone through. The first is not understanding risk, followed by understanding risk and avoiding it, followed by understanding the cost of avoiding risk and trying to find the right level.

Like you point out, the cost of avoidance can be quite substantial.

[bruce511]

Yes, because risk has value, there are substantial gains yo be made taking on risk (and it working out), not to mention substantial losses by both avoiding risk or taking the risk on and it not working out.

From a purely business perspective its ideal to make the other guy take the risk, without financial penalty. More often both parties understand risk and can figure out who wants the value/risk and who prefers the less value/less risk.

[s1artibartfast]

I dont disagree. My point is mainly that if you are always avoiding risk and incurring the cost, you probably aren't doing it right, and probably don't understand the costs you are paying.

Not all losses are substantial, and not all substantial losses are greater the cost to avoid it. don't pay $20 for insurance on a $1 package.

[hunson_abadeer]

> People do it all the time and to far greater extremes. A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

I wasn't advocating against risk-taking. I was advocating for doing it purposefully. Homeownership offers compelling and long-lasting quality-of-life benefits, and it's arguably not even pure "consumption" due to the acquisition of home equity.

Borrowing to buy a "status" car in your 20s, on the other hand, is probably a bad plan. Fleeting gratification and most of the money goes down the drain within 2-3 years. And if you get in the mode of living on credit day-to-day, you're probably gonna be making a lot of purchases of that sort.

[s1artibartfast]

In my reading the author has a pretty good head on their shoulder and an understanding of risk. They aren't going on buying a status car. It sounds like maybe you have a good understanding too if you're not doing the same. So why the concerned reaction to the post? Do you think they're actually making a mistake or are you more worried that someone might read it and get the wrong idea?

[hnfong]

> A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

FWIW I think that's nuts too. Maybe it makes sense for people with a well defined, stable, secure career track (eg. civil servants, academics with tenure, etc.), but for those whose job could be severely disrupted by various shocks (which IMHO should include the majority of people), this taking out a mortgage under the assumption that your earnings would rise as your career progresses is really nuts.

Of course, the idea that a person takes out a mortgage at 30 is baked into modern society, so there are massive social structures to ensure that the average person is actually able to pay off their debt eventually. This includes shaming corporations for firing people or reducing wages for underperforming employees, government subsidies for business that should have just failed, underpaying juniors because otherwise who got money to raise your wages when you have 10 years of experience, etc. etc...

[s1artibartfast]

I don't think it's nuts. I think there are huge costs to not taking risk that are often greater than the actual risk people take on. And it's a balance and you're not going to get it right by avoiding risk entirely.